Saturday, 31 October 2015

As longstanding followers of this blog will know, I have a particular interest in what are called either ‘fiscal councils’ or ‘independent fiscal institutions’. As I have been and will be preoccupied with other issues for a while, I thought I would try and squeeze in one post on recent developments both in the UK and abroad.

In the UK we had Dave Ramsden’s Treasury review (pdf) of the OBR. The most positive aspect of the review is the recommendation for more resources. I guess the headline news was that the OBR would not be asked to cost opposition policies before elections, as the Dutch fiscal council has done for some time, and as the Australian PBO now does. I would have liked a different decision, but my disappointment is mitigated by three factors:

the report does recommend the “OBR should ensure greater availability of tools and data to allow third parties to cost alternative policy options”.

in the UK we have the IFS, which does do this and currently (and rightly) has a quasi-official status

the level of the fiscal debate in the UK media is currently so poor that I’m not sure how much such a development would improve things.

This last point raises something of a paradox. People like me hoped that fiscal councils like the OBR would improve the public debate. This paradox reflects in part the particular nature of the OBR, which would not be allowed to say - for example - that the fiscal charter is economically illiterate (i.e. no economist agrees with it). Fiscal councils in some other countries can do that, and indeed were set up to do that. This is a gap the IFS cannot fill. I guess the OBR will not be allowed to comment on the economics of different fiscal rules until the UK gets a more sensible rule. I think it is quite likely that if the OBR was able to say such things, we would not have had this particular fiscal charter and we would all be better off as a result.

With the rapid growth in the number of fiscal councils around the world, the case for some kind of international network has become much stronger. It is therefore good news is that one is about to be established for those in the EU. There are at least two important roles such a network can have, apart from the obvious one of spreading best practice.

First, it can help establish and maintain independence for individual fiscal councils, which may be put under various kinds of pressure by their national governments. Sometimes this pressure is just verbal, and often indicates that the council is doing its job. I have just come back from Ireland, where the Irish fiscal council criticised a pre-election giveaway by the government. Its chairman John McHale also suggested that it might break the Commission’s fiscal rules. The government then revealed that it had obtained agreement from Brussels, but had not told the fiscal council. It managed to spin this as an error made by the council, which journalists dutifully parrotted. Substantive criticism was thereby deflected. That kind of thing from governments is only to be expected. It becomes more serious when governments react to criticism in financial or even existential terms, as has happened in Canada and Hungary. In those cases, the council needs all the defence it can get.

Second, a network can act as an important pressure group on the Commission. The Commission itself has recently established an Advisory Fiscal Board, which if nothing else can increase the dialogue between the fiscal councils and the Commission. I talked about the dual system of fiscal monitoring within Europe here, and how I hope we will see a gradual reduction in central control and more discretion given to national governments monitored by strong national fiscal councils. If Daniel Gros is right and German hegemony is coming to an end, then maybe it might just happen - one day.

Wednesday, 28 October 2015

One of the reasons that steel plants have been closing in the UK
ratherthan
Germany or France, and that UK manufacturing output has fallen
for the last two quarters, is the strength of sterling and the
weakness of the Euro. The weakness of the euro relative to the dollar could be explained (at least qualitatively) by interest rate expectations:
whenever interest rates do rise in the US, they will surely rise well
before they do in the Eurozone. When domestic interest rates are
expected to rise relative to overseas rates, a currency should
appreciate.

The same logic could be applied to sterling. Indeed some still
believe interest rates could rise in the UK before they rise in the
US. If the UK looks like the US, you would expect on these grounds
for the pound relative to the dollar to be roughly stable, but
sterling to follow the dollar in appreciating against the Euro. To a
first approximation that is what has happened.

The only problem comes if you look at the UK’s external
performance. The current account deficit as a percentage of GDP has
wobbled around 2% for most of this century, but in the last few years
it has increased sharply, coming in at over 5% of GDP in 2014. All
these deficits are takingtheirtoll
on the UK’s net financial position: twenty years ago we owned about
as many overseas assets as there were UK assets owned overseas, but
we are now a net debtor by an amount that will just get larger if we
continue to run large current account deficits. (For more on this,
see Felix Martin intheFT.)

When I calculated
an equilibrium sterling euro rate in 2003, my estimate was 1.365 E/£.
As current rates are close to that, and given the point about
expected interest rates, what is the problem? Unfortunately there are
three. First, that calculation was based on an assumption that the
sustainable UK current account was balance. In other words, if the
rate had stayed at 1.365 E/£, then over time and on average the
current account should have been in balance. Instead we have had
persistent deficits. In the early 2000s that might have been partly
explicable because sterling was a little stronger than my estimate,
but since the beginning of 2008 quite the reverse has been true, but
we have still run deficits. That either suggests my estimate was
wrong (the equilibrium E/£ rate should have been lower), or the
equilibrium rate has depreciated since 2003.

Second, persistent current account deficits that weaken our net
foreign asset position will in any case imply a gradual depreciation
in the equilibrium exchange rate. The worse our net asset position
gets, the greater the trade surplus we need to pay interest on that
net debt. Third, and perhaps more speculatively, if the recent
stagnation in productivity also represents a stagnation in innovation
in the variety and quality of goods produced in the UK, that will also mean a
depreciation in the equilibrium exchange rate.

All this suggests to
me that sterling may currently be overvalued. How can I say this when
there are a huge number of people in that market trying to make money
from getting the ‘right’ rate? Quite simply from experience. The
market is totally focused on very short term movements, and pays very
little attention to estimates of equilibrium rates. When I did my
equilibrium rate calculation in 2002, the actual rate was wandering
around 1.6 E/£, and there was no clear reason why it should be so
much higher than the equilibrium rate. So, even allowing for
expectations about interest rates, it would be quite possible for
sterling to be currently overvalued.

Tuesday, 27 October 2015

This is a sort of companion piece to my earlier post
about the centre-left in UK politics

I complain a lot about the UK media and its coverage of economic issues, so I should in fairness note the
occasions when it does its job well. Here
is Newsnight last night - look around 18 minutes in. The House of
Lords have just voted to delay Osborne’s cuts to tax credits. We
have a discussion chaired by EvanDavis
between the Labour peer who helped achieve that vote, and two Conservative
politicians: JacobRees-Mogg
from the right of the party and TimMontgomerie
from the left.

The first good point is when Rees-Mogg trots out the standard
government line that although these cuts to tax credits will hurt the
working poor (a lot), taken as a package with the increase in the
minimum wage and changes to tax thresholds they will not. Everyone,
including Evan Davis (who once worked at the IFS), turns on him to
tell him he is wrong. That is good journalism: when a government
tells lies they should be called out. Rees-Mogg’s response about
being naive in trusting his Chancellor is a delight.

In contrast Montgomerie acknowledges what the cuts do and how
contrary they are to the government’s rhetoric about helping people
into work and reducing poverty. The second, and even better point, is
when at the end Davis asks Montgomerie where on earth he thought the
pre-election welfare savings the Conservatives proposed were going to
come from if it was not cuts to tax credits. It was an excellent
question, and the response was I suspect quite honest (as Montgomerie
tends to be). The Conservatives never expected to win the election.
Instead their manifesto was an initial bargaining position, and
things like cuts in tax credits were expected to be traded away in
coalition negotiations.

This tells you how weak the centre-right is within the Conservative
party right now. If the Chancellor and the majority of Conservative
MPs thought the same way as Montgomerie, then their response to their
election victory would not be to carry out the elements in the
manifesto they expected to bargain away. It would be so easy for the
Chancellor after the election to find some pretext not to cut tax
credits. Instead Osborne went ahead, hoping that his control of so
much of the media (and what the Treasury publishes) would mean that
he could get away with the gulf between what he claims and what he
actually does.

The weakness of the centre-right in UK politics has been masked
for a long time by Cameron’s pre-2010 spin, a few progressive
social policies and the restraining hand of the Liberal Democrats
within the coalition. As I wrote in that earlier post,
I strongly suspect a strong political centre (left or right) is vital
for good governance, and that both the UK and Europe is suffering
from its absence.The big question people like Montgomerie have to
address is why, over the next five years, they will not sufferthesamefate
as the centre-right within the Republican party in the US.

Monday, 26 October 2015

Nick Rowe has a post where he points out that the outgoing
Conservatives did not abandon Keynes during the Great Recession. He
takes a graph of government spending from an article by MatthewKlein,
but we can make the same point be looking at the underlying primary
balance. (As I have noted many times, no measure of fiscal stance is
ideal. If you want a more detailed analysis of the Canadian macro
position than I will give here, read the Klein article.) According to
the OECD, this moved from a surplus of 2% of GDP in 2006 to a deficit
of 3.2% of GDP in 2010. We saw a similar countercyclical swing in
fiscal policy in the US, but whereas that swing was sharply put into
reverse in the US, in Canada the deficit was still 1.8% in 2013. (The
UK was like the US except the peak deficit was in 2009, and the
reverse was well under way by 2010.)

So we saw a classic Keynesian fiscal policy in Canada. Partly as a
result, Canadian GDP only fell by 2.7% in 2009 and grew strongly in
the next two years. That in turn meant that short interest rates only
stayed on their floor for just over a year, and rose to 1% during
2010. So it all looks like a textbook New Keynesian policy, and close
to the one recommended in PortesandWren-Lewis:
fiscal expansion helped get interest rates above their lower bound.

That was then. More recently GDP has been falling, and interest rates
have been cut to 0.5%. So is it time for a tight fiscal policy, or
instead some additional deficit financed public investment? Ask the
man on the escalator,
the new Canadian Prime Minister. In the election Trudeau played a
classic Keynesian card (Labour leadership please note). Both his two
opponents criticised
this deviation from a balanced budget policy. Trudeau won, so Keynes
remains in Canada. While interest rates may not have yet hit their
lower bound, it makes sense to borrow to invest when rates are low
and when there is a significant risk rates could hit ‘zero’
(Osborne please note).

Unlike governments in Europe and the US, Canada did not dash for
austerity just as the recovery was beginning and while interest rates
were still on their floor. They had a clear choice a week ago to
allow a deficit to finance investment or go for a balanced budget,
and they chose the more sensible fiscal policy. I think there are two
lessons beyond Canada. First, right wing governments do not have to
make major macroeconomic policy mistakes with fiscal policy. Second,
voters do not always
suffer from deficit fetishism.

Saturday, 24 October 2015

This is quite a long piece about politics, that I suspect no one
will like. I have said before that I depart from my comfort zone of
macroeconomics when I think an important point is being missed from
the public debate. In this case the second sentence may follow from
the first.

What should the strategy be for the great majority of Labour MPs who
did not vote for Jeremy Corbyn (ABC=anyone but Corbyn)? They can
continue to expound their misery to receptive political journalists.
They can continue to stand aghast at the dislike that some now in
power hold for their predecessors. But for a group that has lost two
crucial elections within the space of a few months, they really need
a more positive focus.

Tony Payne, director of SPERI at Sheffield University, has a
suggestion
which I think has a great deal of merit. They should “come to terms
fully, properly and honestly with Labour’s record in government
under Blair and Brown between 1997 and 2010”. This is not in some
kind of masochistic, ‘what we got wrong’ kind of exercise, but
rather to recognise what that Labour government got right. I was part
of a group
of academics that looked at economic policy under Labour, and the
sense I got was that there were an awful lot of positives to note.
But in looking at the negatives, one point that should be recognised
is that these (e.g. Iraq, not enough banking regulation, perhaps not
enough local support for inward migration) did not come from any
tendency to be too populist. Instead rather the opposite.

I’ll come back to that in a second, but actually I decided to write
this in response to another
post by Tony Payne, which could perhaps be described as a lament for
the centre-left. You can get the flavour from this passage:

“what underpins and ultimately characterises centrist politics
(whether in its left or right variant) is a rejection of what I see
as the easy moral simplicities of populist politics in favour of the
complex, awkward and often unsatisfying and unsatisfactory world of
governing, of trying to find the best way through the most difficult
problems, even if that involves compromise. The latter is of course
the dirtiest of words in the lexicon of the populist left (and
right).”

I think that speaks to where a lot of the ABCs are right now. They
say we tried to be sensible in the face of difficult problems, but we
were outflanked on both sides by the moral simplicities of populist
politics. I suspect (and to be fair Tony Payne does not make this
link) it also passes as some sort of explanation as to why ABC lost
two elections. They were the realists who lost out to the idealists
and populists. As an explanation I think it is completely inadequate,
and to be frank comes close to denial.

Let me take my own subject as an example, partly because austerity is
also central to much else. In the end what quiteafew
of the ABCs wanted to do was to junk the complex and perhaps awkward
truths of how to run a sensible fiscal policy in favour of the
populist politics of talking about the nation’s credit card.
Osborne’s fiscal charter is not supported by a single economist I
know, but many of the ABC’s have advocated supporting it. In this
case what those ABCs have been doing is adopting - or at least
flirting with - populist politics, but the popular politics of the
right rather than the left.

That in turns comes from what seems to be the dominant mantra of the
ABCs, which is that only they are serious about trying to win
elections. That is why, we are told, they have to adopt the populist
policies of the other side, because only that way can they win.
Notice first how different this is from the noble Weberian concept of
the centre that Tony Payne puts forward. Notice second that these
populist policies seem to come from the right rather than the left:
whenever there is a populist policy from the left (like
renationalising rail), then it becomes time to cast aside populism
and be ‘sensible’.

I have struggled to understand what is going on here. But the thought
that I keep coming back to is regulatory capture. This is the idea
that the regulators of an industry become captured by the industry
itself: by its objectives, values and methods. In some cases the
reason for capture is straightforward (revolving doors), but in some
cases it reflects the fact that regulators cannot match their
industry in terms of knowledge and analysis. My idea is that in this
case instead of an industry you have a Westminster discourse which,
under the coalition, was dominated by the thinking of the
centre-right. Most Labour MPs simply didn’t have the time or
resources to find alternatives to this, and gradually became hostage
to this discourse. As Paul Krugman might say, after a time all they
hear are the views of Very Serious People.

Part of this Westminster discourse involves the tactic of exclusion
for individuals and ideas that are deemed to be outlandish. (Outside
the Overton window, if you like.) I have experienced that on a
personal level recently:
imagine a biologist being told that they would be ‘branded’ if
they gave technical advice to a major political party!? Rather more
important it leads some politicians on the centre left with strong
skills and expertise reluctant to sit at the same table as those in
their own party with more radical views, even when those holding more
radical views have every incentive to seek compromise. You have to
ask who benefits from this.

It is often said in politics that voters vote for and against
incumbents, not oppositions. I doubt very much if Labour party
members voted for Corbyn because they had suddenly become converted
wholesale to a Bennite type platform. Instead they voted against what
the parliamentary party had become. I think recognising their
responsibility for their own failure is the first step to recovery. I
said that the ABCs would do well to follow Tony Payne’s advice and
focus on what the Labour government did right. One of those things
was the regime of tax credits, which cut poverty and made it easier
for people to work. They might then reflect on the reasoning, forces
and processes that led so many of them this July to abstain
on the bill that cut those credits.

The centre left
needs to retrace its steps as a first stage to recovery, and learn
from the many things it got right when in government. In the UK and
elsewhere in Europe it is important this happens sooner rather than
later. Hopefully in doing this it will rediscover positive virtues
and ideals that go beyond simply a negation of populism. I strongly
suspect a strong political centre (left or right) is vital for good
governance, and that both the UK and Europe is suffering from its
absence.

Thursday, 22 October 2015

The big controversy since the Great Recession began has been about
fiscal policy: government spending, taxes and the budget deficit. In
contrast monetary policy has not hit the headlines so much. This is
understandable: while fiscal policy has oscillated from fiscal
stimulus in 2009 to fiscal austerity in 2010, once the recession
became clear (to some earlier than others) monetary policy in the UK,
US and Japan appears to have been unambiguously expansionary, with
interest rates staying at historical lows. The ECB is the exception,
raising rates just before a second Eurozone recession.

Look a little closer however and we find something rather more
worrying. Most people who base their view on economics rather than
politics would regard the recovery from the Great Recession as
disappointing. We have got particularly good reasons to be
disappointed in the UK, but many economists think the US and Japan
could also have done better at reducing unemployment more rapidly.
More worrying still, the recession and the slow recovery may have
caused permanent damage. (See Antonio
Fatáshere
on his work with Larry Summers.) In the UK in particular we appear to
have permanently lost a massive 15% of income during the recession.
That kind of loss over a 7 year period is totally unprecedented in
peacetime.

There are well known mechanisms by which short term output losses
could lead to a permanent reduction in output capacity, known
collectively by economists as hysteresis mechanisms. They include
deskilling of the unemployed, less capital and less capital embodied
technical progress. Just how permanent they are varies by type, but
they all involve real costs in terms of lost output. One that worries
me a lot is how expectations about trend output get downgraded, which
can become self-fulfilling for quite some time.

The people whose job it is to make sure recessions are short-lived
and these kinds of mechanisms do not take hold are in central banks.
Yet if you ask monetary policy makers what they think about the last
7 years, they will not hang their heads in shame. They will not say
it has been a disaster, but what more could we do? They will not say
that, with interest rates near zero, they were powerless to do much,
because unconventional policies like Quantitative Easing were poor
instruments and government fiscal policy was moving in the wrong
direction. Instead they will probably say that overall the last 7
years have not been too bad. This very different view seems both odd
and worrying.

The reason however is straightforward. Monetary policy makers either
regard their primary target as inflation, or are explicitly told that
inflation should be their primary target. While below target now,
inflation was above target in 2011 and 2012, so on balance maybe the
record is not too bad. So looking at what they were asked to do,
monetary policy makers feel little remorse.

In the UK we can put this in a rather startling way. Imagine someone
in 2011 discovered a magical new policy instrument that was
guaranteed to stimulate the economy, and gifted it to the Bank of
England. In all probability they would not have used it. For four
months in 2011 three members of the MPC voted to raise rates. We were
just two MPC members away from following the ECB’s disastrous
course. Just because we avoided that calamity by a whisker does not
mean we should pretend it didn’t happen.

This all comes down to what economists have called the divine
coincidence. This is the idea that you do not need to target both
output and inflation. Ensuring that inflation is on target in a
considered way (by for example looking at inflation two years ahead)
will stabilise output as well. While the US central bank has a dual
mandate (essentially both inflation and output), central banks that
were made independent later (like the Bank of England) have inflation
as their primary target. One of the main reasons for this was a
growing belief before the Great Recession that the divine coincidence
would hold. Target forecast inflation and output will look after
itself.

The idea of the divine coincidence has not had a good recession! As I
explained in one of my better posts,
if the divine coincidence worked a central bank in a parallel
universe that targeted the output gap rather than inflation should
feel exactly the same way about the last 7 years as our inflation
targeters. Yet as I explained there and above they would instead feel
ashamed and frustrated. We know there are good empirical reasons why the divine coincidence might break down when inflation is low:
resistance to nominal wage cuts will mean that monetary policy makers
targeting inflation in a recession will overreact to positive
inflation shocks like oil price increases and underreact to below
target inflation. Add hysteresis, and you can get lasting damage.

So one lesson of the last 7 years must be that relying on the divine
coincidence is a mistake. A primary goal of the central bank is to
end recessions quickly, and giving it a single primary target of
inflation can detract from that. One obviousimprovement
is to give the central bank a dual mandate, although the best way to
specify that is not clear. Another possibility is to combine output
and inflation into a singletarget,
and yet another is to raise
the inflation target to a level where the divine coincidence might
still hold. Luckily for me I have thought quite a bit about these
questions already,
but in the next few months I may need
to come off any fences that remain.

Wednesday, 21 October 2015

“Central banks are often accused of being obsessed with inflation.
This is untrue. If they are obsessed with anything, it is with fiscal
policy.”

As an academic turned central banker, King knew of what he spoke. The
fear is sometimes called fiscal dominance: that they will be forced
to monetise government debt in such a way that means inflation rises
out of control.

I believe this fear is a key factor behind central banks’
reluctance to think seriously about helicopter money. Creating money
is no longer a taboo: with Quantitative Easing huge amounts of money
have been created. But this money has bought financial assets, which
can subsequently be sold to mop up the money that has been created.
Under helicopter money the central bank creates money to give it
away. If that money needs to be mopped up after a recession is over
in order to control inflation, the central bank might run out of
assets to do so. A good name for this is ‘policy insolvency’. [1]

There is a simple way to deal with this problem. [2] The government
commits to always providing the central bank with the assets they
need to control inflation. If, after some doses of helicopter money,
the central bank needs and gets refinanced in this way, then
helicopter money becomes like a form of bond financed fiscal
stimulus, but where the bond finance is delayed. In my view that
delay may be crucial in overcoming the deficit fetishism that has
proved so politically successful over the last five years, as well as
giving central banks a much more effective unconventional monetary
instrument than QE. [3] But central banks do not want to go there,
partly because they worry about the possibility of a government that
would renege on that commitment.

The fear is irrational for two reasons. First, central banks already
face the possibility that they may make sufficient losses on QE that
they may require refinancing by the government. The Bank of England
has requested and been given a commitment to cover those losses.
There is no conceptual difference between this and underwriting a
helicopter drop except probabilities.

The second reason is more basic. In today’s world, where in the
major economies it is now well understood that interest rates need to
rise in a boom to control inflation, it is hard to imagine a
government that would make its central bank impotent by refusing to
provide it with assets. If such a government ever existed, it would
have long before ended central bank independence because it wanted to
stop it increasing interest rates with the assets it already had.
Under the government of central bank nightmares, the central bank
would lose its independence before it could complain that the
government was reneging on an earlier commitment to underwrite
helicopter money.

The fear of fiscal dominance is itself not irrational, although it
seems increasingly unlikely it would happen in a modern democracy.
What is irrational is thinking that allowing helicopter money in a
recession would make fiscal dominance more likely to happen. [4]

I have also argued that this irrational fear has already been costly.
I have described
how the widespread adoption of austerity at the beginning of the
recovery represents the failure to politicians to follow basic macro.
Here central banks become a policy intermediary between academia and
politicians: they have the knowledge of how costly austerity can be
when rates are zero. But what politicians heard from senior central
bankers was not these costs, but encouragement to pursue austerity.
An irrational fear of budget deficits may be one explanation for
central banks being economical with the truth.

Central banks overcame one big psychological barrier when they
undertook Quantitative Easing. That was the first, and perhaps the
more important, stage in ending their primitive fear of fiscal
dominance. They now need to complete the process, so we can start
having rational discussions about alternatives to QE.

[1] A central bank cannot actually become insolvent, as this post
explains.

[2] No one to my knowledge has ever proposed giving the central bank
the legal power to collect a poll tax.

[3] A key feature of deficit fetishism is a concern about deficits in
the short term. Politicians seem happy to take measures that cut
deficits in the short term even if debt becomes higher in the longer
term. Indeed the analysis presented
by DeLong and Summers argues that hysteresis forces would not have to
be that large before austerity would raise long run debt to GDP
levels. We also know that deficit fetishism is specific to increases
in debt caused by recessions: over the longer run if anything deficit
bias implies rising rather than falling levels of government debt. So
any form of fiscal stimulus that avoided an increase in debt in the
short run but not in the long run would avoid deficit fetishism. That
is what a money financed fiscal stimulus aka helicopter money aka
People’s QE could do.

[4] Why am I confident that a government could not be so obsessed
with its debt that it might renege on an underwriting pledge? It is
because deficit fetishism is only politically attractive in a
recession when individuals are themselves cutting back on their
borrowing, and therefore feel the government should do the same. This
will not apply when the recovery has taken place and inflation is in
danger of exceeding its target.

Tuesday, 20 October 2015

I have madefun
in the past about Labour politicians and supporters who in public
trip up once the word borrowing is mentioned. An interviewer only has
to ask ‘but if Labour reverses this cut it will mean more
borrowing’ and the interviewee stumbles around in a way that
shouts to anyone watching that Labour have a vulnerability here.

It is a vulnerability that helped lead to the disastrous
decision under the interim leadership not to oppose Osborne’s cuts
in tax credits, and to McDonnell’s embarrassing initial decision
(now reversed) to support the charter. But now that Labour has sorted
itself out on both issues, it needs to stop avoiding the borrowing
question. Take this otherwise assured performance by Owen Smith on
Newsnight last night (27 minutes in, HT Owen Jones).

Here is what Owen Smith should have said when asked whether reversing
the cuts to tax credits would lead to more borrowing.

“The Chancellor has said he needs to cut tax credits to meet his
new fiscal charter. Labour oppose this charter, because it makes no
economic sense. Osborne cannot find a single economist who supports
his plan. Imposing a work penalty to pay borrowing off more quickly
is just counterproductive, because discouraging people from working
makes the economy weaker. This was supposed to be a government that
encouraged work, yet here is the Chancellor doing the opposite in
order to meet a charter that only his MPs support.”

If the interviewer persists with “so you will borrow more”, say

“Labour would not need to cut tax credits because we would balance
current income and spending, leaving room for the country to invest.
Labour would borrow to invest, whereas Osborne is paying for the
little public investment he is doing by cutting tax credits. What
matters is government debt in relation to GDP, and our policy would
mean that debt relative to GDP would fall under Labour.”

I am sure those
skilled in spin could sharpen this, but you get the idea. The days
when deficit fetishism grippedvoters
are comingtoanend.
Labour needs to change its rhetoric to reflect this, and paint
Osborne into the ideological corner he occupies.

Monday, 19 October 2015

When talking about the Great Recession in the UK, we all know (I
hope) that this is still the slowest recovery for at least a century and
that we have only just regained pre-recession levels of output per
head. I find it very frustrating when some people respond by saying
the story is quite different when it comes to employment. The
frustration is because the remark reflects a confusion which is not
trivial to explain to non-economists, coupled with uncertainty about
whether this is a real confusion or just political banter.

I was inspired to write about this again by a very good piece
by Larry Elliott in the Guardian. He puts it well by talking
about how we coped with recession, but I thought I could try and
summarise the point slightly differently. In a recession, looking at
output is all about the size of the cake. Looking at employment is
about how that cake is distributed.

The recession of the early 1980s involved a smaller decline in
output, but a bigger and much more persistent increase in
unemployment. In contrast the really distinctive feature of this
recession has been the decline in real wages. These differences are
almost surely linked: unemployment increases were smaller this time,
and unemployment then fell rapidly, because real wages declined. Low
wages encouraged firms to first fire fewer workers, and later to take
on more. There remains a lot we do not know, such as whether this is all
a result of the recession or if other factors were involved, and to
what extent is a more flexible labour market responsible. This is
really just the UK’s productivity puzzle expressed in a different
form.

I think most economists would agree with Larry Elliott that the Great
Recession in the UK was distributed in a better way than earlier
recessions. The high costs of prolonged involuntary unemployment are,
I hope, also well known. Whether any of this better distribution
should be credited to current politicians seems doubtful: if any
politician deserves credit, the most obvious is Margaret Thatcher.

If you look at this
in terms of the size of the cake (output) and its distribution
(employment and real wages), then you can see why those who dispute
the claims about how poor the recovery from this recession has been
by pointing to employment are making a category mistake. It is almost
certainly better that a recession should lead to declines in real
wages rather than increases in unemployment. But to argue that rapid
employment growth excuses poor output growth is just another way of
celebrating a disastrous productivity performance.

Saturday, 17 October 2015

When a Tory voter emotionally complained
about how she had been deceived about cuts to her tax credits, it
caught the media’s attention. I don’t want to get into the debate
that followed about whether she deserved sympathy or not, except to
say this just shows up some elements of the left at their
sanctimonious worst. What struck me was the juxtaposition of this
with another remark I saw elsewhere, which is that everyone who had
looked at the numbers knew Osborne would cut tax credits after the
election. This remark is correct, if be ‘knew’ we mean highly
likely.

That information had clearly not got through to this Tory voter.
Conservative MPs know
she is not alone, which is of course why the Prime Minister liedaboutit
before the general election, and why he and Osborne continue to try
and coverup
the facts. It is the media’s job to get information across, and on
this it clearly failed. Most in the parts of the print media that see
that as part of their job did their best: those in the part who are
paid to deceive also did their job well. Whether we should let those
who produce news like celebrity gossip and sports reporting use that
platform to peddle political propaganda is an interesting issue. But
these do not arise in the UK with the television media, which has a
duty to inform in an impartial way which it is clearly failing to
fulfill.

This is not about the television media’s coverage as a whole, but
how information is presented in the kinds of programmes that this
Tory voter is likely to watch: the major news programmes, interviews
with the Prime Minister or Chancellor etc. Take for example the clip
where the Prime Minister lied about cuts to tax credits. There David
Dimbleby asks him by saying “some people” have suggested tax
credits would be cut, rather than “every non-partisan expert”.
This may seem small, but this kind of detailed textual analysis is
critical (and it is what many journalists have been trained to do).

Of course this is not an isolated incident. The idea that the deficit
was a consequence of Labour profligacy rather than the recession is
widely believed (as another pre-election debate illustrated), which
means the television media again failed. In other areas where the
partisan right wing press do their best to mislead, like welfare and
immigration, the average person’s perception of key facts is wildly
wrong (in the direction they are misled), which means the television
media has also failed. Journalists seem happy to quote large sums of
money on magnitudes like government debt in a way designed to make
them sound scary, but fail to put them into historical context (it
needs just one chart), which would mean focusing on the debt to GDP
ratio and pointing out that this will fall even if we run modest
deficits. The politically loaded and inaccurate
term taxpayers money is freely used, and the term welfare benefits
misused. I could go on and on, and have.

Political
journalists working in television try hard to be unbiased in a party
political sense. They do this partly because there are political
machines that try and hold them to that. I would suggest being
unbiased towards the facts, and more positively their duty to inform,
are at least as important. Unfortunately there are no equivalent
mechanisms to ensure this happens.

Thursday, 15 October 2015

The House of Commons passes into law a fiscal charter which enshrines
in the short term another period of severe austerity, and thereafter
commits the government to a crazy fiscal rule. The media (with one or
two notable exceptions) focus on Labour U-turns and 20 odd abstentions.
The Labour leadership have only themselves to blame of course. Which
given the way the media operates is true. But does it have to be this
way?

Behind the gimmick of a charter is a real policy that will impact on
everyone. This policy is the reason the government will make
substantial cuts to tax credits for millions of poorer working
people, making their already difficult lives substantially harder.
George Osborne said as much in his budgetspeech. Would these people really think that this was of less
interest than endless discussion of Labour embarrassment? Who are
television news programmes made for: ordinary people who receive tax
credits or a Westminister bubble obsessed with political process?

The charter is all about macroeconomics: fiscal policy and fiscal
rules. There is an academic literature on fiscal policy and fiscal
rules. I have not come across a single non-partisan academic
economist who supports this charter, and certainly not one who knows
about this literature. For an academic discipline that is always
accused of being hopelessly divided, that is saying something. The
reasons are not that difficult to get across:

The policy restricts public investment at just the time that public
investment should be high because borrowing and labour are cheap. Its a near universal view among economists that now is the time for higher public investment.

Targeting a surplus year in and year out is likely to lead to
harmful volatility in tax rates or spending. All macro theory says
the deficit in the short-term should be a shock absorber.

If the charter is achieved, it will bring debt down ridiculously
fast, penalising the current working generation.

Fiscal austerity when interest rates are very low is never a good
idea

Again with the exception of a few newspapers, I heard nothing of this
in media reporting. Instead I heard misleading statements, like you
needed surpluses to get debt down when what matters is the debt/GDP
ratio. (2% deficits with normal growth will reduce the debt ratio.)

Even the ‘highbrow’
news programmes like Channel 4 news and Newsnight chose to spend most
of its time talking about U-turns on either side. No mention of the
complete lack of economic support for this charter. On an issue with
such important consequences, is that fulfilling a duty to inform? We
have millions of hardworking but poor families who will be made
substantially worse off as a result of a fiscal rule which no
academic economist has supported? Will these families ever find that
out? What does that tell us about our media, and our democracy?

Wednesday, 14 October 2015

I saw you talking to those people the other day. You really should
think twice before being seen to talk to
people like that.

Similar lines could be taken from countless novels about class,
race or some other form of social exclusion. When I agreed to be
part of a group that would occasionally advise the new Shadow
Chancellor John McDonnell on economic policy, I must admit I hadn’t expected something
like that to be said to me by economists I respect. Political hacks
would say it for sure, but economists interested in promoting good
policy?

Just to be clear, McDonnell’s group places no restrictions on what
its members can say in public about policy. We are not required to
support or endorse Labour policy. Indeed, to the extent that Labour
does adopt a policy that any of its members disagree with, the group
gives those members a slightly higher public profile if we make that
disagreement public. As the media generally fails to distinguish good
economic advice from political spin, a direct channel like this group
seemed like a good idea, with no cost to its members except their
time. Except ...

On Monday McDonnell announced a U-turn: he would no longer support
Osborne’s new fiscal charter. The media focus, as ever, was on the
‘political shambles’ of a U-turn, with only the occasional
suggestion that the charter itself was economic nonsense. (The body
of this
FT leader was an exception.) A few economists on twitter, however,
suggested that this political shambles somehow reflected badly on the
members of the advisory group. One described the members of the group
being ‘branded’ by association. If other economists reading this
sympathise with that view, you need to read on.

As this FT piece suggests,
the new Labour position of not supporting the charter is likely to
find general support among the advisory group. (We have not yet met.) Indeed, as I said to the FT, a huge majority of macroeconomists — particularly if they know something about fiscal policy — would recommend opposing the charter. I have no idea if the views of any of the group had any influence on
this U-turn, but if it did that means the group is having some
influence, which has to be a positive thing. Indeed, as I know some
of those making this ‘guilt by association’ charge actually
oppose Osborne’s charter, they should welcome the fact that we may
have helped change Labour’s position. Instead they are saying his
change of mind reflects badly on us!? It makes no logical sense,
unless something else is going on here.

As I said in an earlier post, I am happy to give advice on macro
policy to any of the mainstream political parties, whether I agree
with their current macro or other policies or not. Over the past five
or more years I have given public and private advice to Treasury
officials working for the actual Chancellor. I feel strongly that
governments should and can follow good macroeconomics whatever their
political persuasion. For me to say I’m not going to talk to you
because I do not like your policy on X would be as silly and childish
as it sounds.

So what is going on with economists who would not blink an eye at me
giving advice to a Chancellor whose policies I often (but not always)
oppose, but suggest that when it comes to the Labour party there is
some kind of guilt by association? It seems to me that they are,
knowingly or not, part of a political game. The game is to give the
current Labour leadership some kind of pariah status. If we were
talking about a party like the BNP, that might make some sense, but
for the main opposition party in which a radical leadership is going
to have to reach a consensus with their less radical MPs it does not.
Unless of course your primary interest is to support another party.
Which is why the government and many journalists want to foster this
pariah status frame of mind. It is a shame that some economists who
are parroting this guilt by association line seem not to understand
the political game they are inevitably playing.